There has been recent dispute both on this blog and on Twitter about whether a company has a duty to maximise its profits, or not. This is the law, from the Companies Act 2006:
172: Duty to promote the success of the company
(1)A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to–
(a)the likely consequences of any decision in the long term,
(b)the interests of the company's employees,
(c)the need to foster the company's business relationships with suppliers, customers and others,
(d)the impact of the company's operations on the community and the environment,
(e)the desirability of the company maintaining a reputation for high standards of business conduct, and
(f)the need to act fairly as between members of the company.
(2)Where or to the extent that the purposes of the company consist of or include purposes other than the benefit of its members, subsection (1) has effect as if the reference to promoting the success of the company for the benefit of its members were to achieving those purposes.
(3)The duty imposed by this section has effect subject to any enactment or rule of law requiring directors, in certain circumstances, to consider or act in the interests of creditors of the company.
So, where does it say that profit maximisation has to be the object of the company? Quite clearly it doesn't.
Sure, 'success of the company for the benefit of its members' clearly implies a duty to generate profit, or at least a positive cash flow, but maximise it? No way! This is at best a constrained requirement, as is clear from sub-paragraphs a to f.
And in that case judgement has to be exercised. Tax cheating may not in that case be sound judgement. It is harmful to employees. It may be harmful to the members, who may have to pay more tax as a result in a personal capacity. It may harm the long term interests of the company whether by reason of risk of tax challenge or because the directors' believe that the resources they need from the state may not be available to them.
So what is abundantly clear is that in UK law there is:
a) No duty to maximise profit
b) No duty to minimise tax bills
c) A duty to exercise judgement.
And there is no way tax cheating can be reconciled with the legal obligation of the directors because it is clearly contrary to the interests of pension fund members, employees, the long term stability of the company and as such to its duty to suppliers, customers and others.
So shall we stop the absurd claim that tax avoidance is a duty once and for all? It's not. And it's time we said so, loud and clear.
Cheating is an exercise in poor judgement. As such it is contrary to company law.
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One could argue though that in a commercial world if they don’t maximise profit they won’t be around long enough to observe the other bits.
BB
But the reality is they don’t maximise profits – or they would not, for example, pay the executive salaries they do
More than that – they have no idea how to maximise profit as it is a wholly unknown number
Pointing out the obvious here but the Companies Act 2006 is strictly UK law. How is this law reconciled with corporate charters in a multinational context? Does this law apply to all activities conducted by corporations within the UK?
It would apply to all UK parent companies – which is the issue here
And therefore to all their subsidiaries too
Sorry, I missed most of the dispute in question —Â can I ask why the discussion is applicable to only UK companies? The statement in the title of your post implies a global reach and the behaviour of all companies within the UK is relevant even within a strictly UK context.
My point is simply that if a foreign subsidiary is owned by a UK parent then it is the UK rules that apply to the subsidiary – no one will sue its subsidiaries elsewhere for not maximising their profits
I see. Conversely those companies owned by US parent companies acting within the UK are not subject to the Companies Act 2006. Please correct me if I am mistaken but as I understand it the majority of legislation governing the duty of directors for corporations formed in the USA does not include provision for placing the impact of company operations on the community and environment on a par with a corporation’s own self-interest.
I agree that it is incorrect to say that there is an explicit legal duty to maximise profits or avoid tax. It would seem that the issue is — outside of the Companies Act 2006 and similar legislation elsewhere — the lack of any explicit obligation to put the public sphere on a par with a corporation’s own self-interest.
Fundamentally you are right – since only shareholders can sue on duty the CA 2006 does not really apply on this issue to companies owned outside UK e.g. by US parent company
Hi Richard, just so that I understand more fully what you are saying. Are you saying that all subsidiaries of a UK incorporated parent company are subject to the provisions of UK company law even if a particular subsidiary was incorporated under the company law provisions of another country? Regards Augustine
If the subsidiary is 100% owned (and vast majority are) then if the duty is to the members and the members are a UK parent company then it is UK law that would apply to this matter on duty – of course. Law elsewhere can’t set the commercial objectives of the company – and even if it did there would be no one to bring the legal action anyway
Hi Richard, thanks for the response. I must not understand UK company law correctly. I thought the directors owed their duties to the company, not to the members of the company. You seem to suggest that the directors owe their duties to the members. It would be great if you would point me in the direction of any authority for this.
Regards Augustine
You need to re-read Richard’s original post, Augustine, because unless he’s misquoted/typed it clearly says director to members. Here’s the relevant section again:
172: Duty to promote the success of the company
(1)A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to–
Dear Richard and Ivan, I had a look at the CA 2006 as Ivan seems to have missed the point. Section 171 says
“The general duties specified in sections 171 to 177 are owed by a director of a company to the company.”
On my reading of that section the duty is owed to the company not to the members which is what the subsequent comment by Richard Corner suggested.
I am not sure how what Richard M says and Ivan’s suggestion to re-read the original blog fits into to s171.
If the directors have duties to the company (s171) and not to the members (as Richard M (and I assume Ivan) is suggesting) then Richard M’s “analysis” may not be as useful as some at first blush may have thought.
His suggested analysis also does not address (which is not a criticism just an observation) MNCs and the situation under which an arrangement that reduces tax in another country might benefit the UK parent company in a successful manner for the benefit of the members as a whole.
Regards
Augustine
You miss the point: a director owes his / her duty to the company
The directors collectively owe their duty to the members
So the company can hold the director to account
The members can hold the directors to account
Think of it as collective cabinet responsibility by the board and duty to the PM by the director
I did very clearly imply this – but agree I could have been more explicit
This is nonsense. When presented with two options, one where the company pays more tax and therefore has less for shareholders, and one where the company pays less tax and has more for shareholders, the directors are under a duty to choose the latter, as long as it is clearly legal. Just because there isn’t an express prohibition against overpaying for raw materials, overpaying for premises or (as in this case), paying more tax than is necessary, doesn’t mean that the overriding duty to act in the best interests of shareholders (qua shareholders, not in any incidential capacity as, say, UK taxpayers) doesn’t cover those examples.
Directors following your legal advice deserve to be sued.
And that is simply not true
Sound judgement shows that high tax states are highly profitable
It pays to pay tax
Wise directors know it
And your legal advice is as worthless as you obviously think your own opinion to be
Shareholders own public limited companies (plc), the directors are only employees paid, by the company with shareholders money plus loans (if any), to manager the plc.
A plc is an inert object incapable of thought or deed.
Through the mechanism inherent in the AGM the shareholders can dismiss the directors.
It is possible to be a shareholder AND a director ….
Which perhaps is where the problem
I wish I had your faith in corporate democracy
At Common Law the duties owed by directors to a company and its shareholders were either non-existent or notoriously lax. Now statute provide some protection and under Company Law directors owe a fiduciary duty to act in what they bona fide believe is in the best interests of the company as a distinct legal person – although not necessarily to the shareholders. But the directors can nNOT be said to be acting bona fide if they use their powers for some ulterior or collateral purpose
And it is a criminal offence of fraudulent trading under Section 458 of the Companies Act 1985 which applies to anyone who has been party to the carrying on of the business of a company with intent to defraud creditors, or any other person, or for any other fraudulent purpose.
Company Law is complex and smart lawyers and devious accountants can readily create a web of obscure subsidiary companies based outside UK legal jurisdiction — conveniently in the Crown Dependencies – to manipulate the peculiarities connecting legal tax avoidance with criminal tax evasion.
Which is what this blog is all about!